Some Confidence Is Lacking In 11 bit studios S.A. (WSE:11B) As Shares Slide 26%

To the annoyance of some shareholders, 11 bit studios S.A. (WSE:11B) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 67% loss during that time.

In spite of the heavy fall in price, given close to half the companies operating in Poland's Entertainment industry have price-to-sales ratios (or "P/S") below 3.2x, you may still consider 11 bit studios as a stock to potentially avoid with its 3.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for 11 bit studios

How 11 bit studios Has Been Performing

With revenue growth that's superior to most other companies of late, 11 bit studios has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think 11 bit studios' future stacks up against the industry? In that case, our free report is a great place to start.

How Is 11 bit studios' Revenue Growth Trending?

In order to justify its P/S ratio, 11 bit studios would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 155%. Pleasingly, revenue has also lifted 83% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 5.7% per year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 29% per year, which is noticeably more attractive.

With this information, we find it concerning that 11 bit studios is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does 11 bit studios' P/S Mean For Investors?

11 bit studios' P/S remain high even after its stock plunged. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that 11 bit studios currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for 11 bit studios that you need to be mindful of.

If you're unsure about the strength of 11 bit studios' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.